[Federal Register Volume 62, Number 10 (Wednesday, January 15, 1997)]
[Notices]
[Pages 2200-2202]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-902]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38140; File No. SR-Amex-96-34]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the American Stock Exchange, Inc., Relating to Independent
Contractors
January 8, 1997.
I. Introduction
On September 27, 1996, the American Stock Exchange, Inc. (``Amex''
or ``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') a proposed rule change pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule
19b-4 thereunder.\2\ The proposal adopts Exchange Rule 341B,
``Independent Contractors,'' which provides that the Amex will not
object to the assertion of independent contractor status by a natural
person who is a (i) registered representative, (ii) securities lending
representative, or (iii) securities trader if such status will not
preclude his or her characterization and treatment as an employee for
purposes of the Constitution and rules of the Amex.\3\
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\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-(4) (1996).
\3\ On October 2, 1996, the Amex amended its proposal to submit
the proposal pursuant to Section 19(b)(2) under Act. See Letter from
Claudia Crowley, Special Counsel, Legal and Regulatory Policy, Amex,
to Katherine England, Assistant Director, Division of Market
Regulation (``Division''), Commission, dated October 2, 1996
(``Amendment No. 1''). On October 23, 1996, the Amex amended its
proposal to eliminate inconsistencies between Amex Rule 341(a) and
Amex Rule 341, Commentary .01. See Letter from Claudia Crowley,
Special Counsel, Legal and Regulatory Policy, Amex, to Katherine
England, Assistant Director, Division, Commission, dated October 23,
1996 (``Amendment No. 2''). Specifically, Amendment No. 2 deletes
language indicating that only officers of a member must be approved
and provides that registered representatives, securities lending
representatives, securities traders, and direct supervisors of those
persons must be registered and approved. Amendment No. 2 also
includes a technical change which clarifies proposed Amex Rule 341B,
``Independent Contractors.'' On October 24, 1996, the Exchange
replaced an incorrect reference to Amex Rule 342 with a reference to
Amex Rule 320. See Letter from Claudia Crowley, Special Counsel,
Legal and Regulatory Policy, Amex, to Yvonne Fraticelli, Attorney,
Division, Commission, dated October 24, 1996 (``Amendment No. 3'').
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Notice of the proposed rule change and Amendment Nos. 1, 2, and 3
to the proposed rule change were published for comment in the Federal
Register on November 5, 1996.\4\ No comments were received on the
proposal. This order approves the proposed rule change, as amended.
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\4\ Securities Exchange Act Release No. 37884 (October 29,
1996), 61 FR 56981.
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II. Description of the Proposal
According to the Amex, several member organizations recently have
begun to utilize independent contractors to perform duties
traditionally performed by registered employees. To date, the Exchange
has required member organizations who utilize independent contractors
to provide a written acknowledgement that the member organization will
supervise and otherwise be responsible for the independent contractor
in the same manner as if he were an employee. In order to clarify the
Exchange's requirements and to ensure that independent contractors are
appropriately subject to the Exchange's jurisdiction, the Amex proposes
to adopt new Exchange Rule 341B.
Proposed Amex Rule 341B provides that the Amex will not object to
the assertion of independent contractor status by a natural person who
is a (i) registered representatives, (ii) securities lending
representative, or (iii) securities trader if such status will not
preclude his or her characterization and treatment as an employee for
purposes of the Constitution and rules of the Amex. Under the proposal,
the natural person asserting independent contractor status and the
member organization must agree that the natural person is subject to
the organization's direct, detailed supervision, control and discipline
and, if required by Amex Rule 330, ``Fidelity Bonds,'' is covered by
its fidelity bond. Once a member organization approves a registered
person's independent contractor status, the following conditions must
be satisfied:
The member organization provides written assurances to the
Exchange that it will supervise and control all activities of the
independent contractor effected on its behalf, to the same degree
[[Page 2201]]
and extent that it regulates the activities of all other registered
persons and in a manner consistent with Amex Rule 320, ``Offices--
Approval, Supervision, and Control;'' \5\
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\5\ See Amendment No. 3, supra note 3.
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The member organization submits to the Exchange a copy of
a written agreement between the independent contractor and the member
organization which provides that the independent contractor will engage
in securities related activities solely on behalf of the member
organization (except as otherwise explicitly may be permitted by the
member organization in writing), that such securities related
activities will be subject to the direct detailed supervision, control
and discipline of the member organization, that such person is not
subject to a statutory disqualification as defined in Section 3(a)(39)
of the Act, and that nothing therein will negate any of the foregoing;
The independent contractor agrees in writing to be subject
to the Exchange's jurisdiction; and
The member organization provides the Exchange with
assurances that, if required by Amex Rule 330, the independent
contractor is covered by the organization's fidelity insurance and is
in compliance with applicable state Blue Sky provisions.\6\
\6\ The Amex notes that these requirements do not apply to the
traditional practice of a firm using an independent floor broker to
execute a transaction on the floor of the Amex.
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Written notice of the cessation of independent contractor status
must be given to the Amex. Proposed Rule 341B does not apply to persons
delegated supervisory functions (e.g., branch office manager,
registered representative-in-charge), nor does it permit the
incorporation of a registered persons. The Amex notes that the New York
Stock Exchange (``NYSE'') has comparable requirements for independent
contractors.\7\
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\7\ See NYSE Interpretations and Guidance Handbook, 345(a)/02.
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The Amex also proposes to amend Definition six, ``Registered
Employee,'' to provide a definition for ``Registered Person.'' Under
Definition six, as amended, a registered person will mean not only a
branch office manager or a registered representative, but also a
securities lending representative, a securities trader, and a direct
supervisor of a securities lending representative or a securities
trader.
In addition, the Amex proposes a amend Amex Rule 340, Commentary
.03, to require that a securities lending representative and his or her
direct supervisor must pass any applicable qualification
examination.\8\
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\8\ Currently, there is no qualification exam for securities
lending representatives.
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The Amex proposes to amend Exchange Rule 341 to require that
securities traders and securities lending representatives \9\ (and
their direct supervisors), as well as registered representatives, must
be registered with and approved by the Exchange and, as applicable,
must pass a qualification examination acceptable to the Exchange. Amex
Rule 341, Commentary .01, as amended, will provide that a natural
person who is an independent contractor and who performs the duties of
a registered representative, securities lending representatives, or
securities trader is subject to Amex Rule 341.
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\9\ Exchange Rule 341, as amended, defines a securities lending
representatives as a person who has the discretion to commit a
member or member organization with which he is associated to any
contract or agreement involving securities lending or borrowing
activities with any other person. Amex Rule 341, as amended, defines
a securities trader as any person engaged in the purchase or sale of
securities or other similar instruments for the account of a member
or member organization with which he is associated and who does not
transact any business with the public. The Amex proposes amend
definition six, ``Registered Employee,'' to provide that a
``registered person'' will include a securities lending
representative, a securities trader, and a direct supervisor of a
securities lending representative or a securities trader, in
addition to a branch officer manager or a registered representative.
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The Amex believes that the proposed rule change is consistent with
Section 6(b) of the Act, in general, and furthers the objectives of
Sections 6(b)(5) and 6(b)(6), in particular, in that it is consistent
with the Exchange's regulatory responsibilities and will promote just
and equitable principles of trade and protect investors and the public
interest.
III. Findings and Conclusion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5) \10\ in that it is
designed to prevent fraudulent and manipulative acts and practices and
to protect investors and the public interest.\11\ Specifically,
proposed Amex Rule 341B will help to provide for adequate supervision
of persons asserting independent contractor status by requiring members
to provide direct, detailed supervision, control and discipline of
independent contractions.\12\ In addition, the proposed amendments to
Amex Rules 340 and 341 will help the Amex to monitor securities traders
and securities lending representatives, as well as direct supervisors
of registered representatives, securities traders, and securities
lending representatives, by requiring such persons to register with and
be qualified and approved by the Amex.
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\10\ 15 U.S.C. 78f(b)(5) (1988).
\11\ In approving this rule, the Commission has considered the
proposed rule's impact an efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\12\ In 1982, the Division issued a letter restating the
Division's policy toward independent contractors. See Letter from
Douglas Scarff, Director, Division, Commission, to Gordon S.
Macklin, President, National Association of Securities Dealers,
Inc., dated June 18, 1982 (``1982 Letter''). In its 1982 Letter, the
Division noted that the Act requires that a person selling
securities be registered with the Commission as a broker-dealer
under Section 15(a) unless he is an associated person as defined in
Section 3(a)(18) of the Act. With regard to securities salespersons
designated as independent contractors, the Division stated that
unless an independent contractors's activities are subject to
control by the broker-dealer within the scope of Section 3(a)(18) of
the Act, the salesperson must be registered individually as a
broker-dealer. The Division noted that an independent contractor
salesperson whose activities are subject to control by a broker-
dealer must be registered with a self-regulatory organization and
should be covered by the employer broker-dealer's fidelity bond.
Finally, the Division stated that a firm a responsible for ensuring
either that an independent contractor is registered as a broker-
dealer or assuming the supervisory responsibilities attendant to a
relationship with an associated person. The Commission believes that
the Amex's proposal is consistent with the 1982 Letter.
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According to the Amex, several member organizations recently have
begun to utilize independent contractors to perform duties
traditionally performed by registered employees. To date, the Exchange
has required member organizations who utilize independent contractors
to provide a written acknowledgment that the member organization will
supervise and otherwise be responsible for the independent contractor,
in the same manner as if he were an employee. This position is
consistent with the 1982 Letter. The Commission believes that the
proposal will protect investors and the public interest by codifying
the Amex's policies governing supervision of independent contractors in
new Amex Rule 341B. In addition, the Commission believes that Amex Rule
341B will facilitate compliance with the Exchange's rules and the
federal securities laws by providing a clear statement of the Amex's
policy regarding supervision of independent contractors and by
requiring members to provide direct, detailed supervision, control and
discipline of independent contractors.
Amex Rule 341B provides that the Amex will not object to the
assertion of independent contractor status by a
[[Page 2202]]
natural person who is a (i) registered representative, (ii) securities
lending representative, or (iii) securities trader if such status will
not preclude his or her characterization and treatment as an employee
for purposes of the Constitution and rules of the Amex.\13\ The
independent contractor and the member must agree that the independent
contractor is subject to the member's direct, detailed supervision,
control and discipline. In addition, Amex Rule 341B requires a member
to assure the Exchange in writing that it will supervise and control
all activities of the independent contractor effected on the member's
behalf to the same degree and extent that it regulates the activities
of all other registered persons and in a manner consistent with Amex
Rule 320.
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\13\ As noted above, only a natural person who is a registered
representative, securities trader or securities lending
representative may assert independent contractor status. Telephone
conversation between Claudia Crowley, Special Counsel, Legal and
Regulatory Policy, Amex, and Yvonne Fraticelli, Attorney, OMS,
Division, Commission, on December 6, 1996. Persons with supervisory
functions may not assert independent contractor status. In addition,
Amex Rule 341B does not permit the incorporation of registered
persons.
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Amex Rule 341B further provides for supervision of independent
contractors by requiring the member to submit to the Amex a copy of a
written agreement between the member and the independent contractor
which provides that: (1) The independent contractor will engage in
securities related activities solely on the member's behalf (except as
otherwise permitted by the member); (2) the independent contractor's
securities related activities will be subject to the direct, detailed
supervision, control and discipline of the member; and (3) the
independent contractor is not subject to a statutory disqualification,
as defined in Section 3(a)(39) of the Act. In addition, the proposal
requires a member to assure the Exchange that, if required by Amex Rule
330, the individual is covered by the organization's fidelity insurance
and has complied with applicable state Blue Sky provisions. Amex Rule
341B also requires an independent contractor to subject himself to the
Amex's jurisdiction.\14\
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\14\ Registered persons submit to the authority of the
organizations to which they apply for registration on the Uniform
Application for Securities Industry Registration or Transfer (``Form
U-4''). Accordingly, the independent contractors discussed in the
proposal become subject to the Amex's jurisdiction when they apply
for registration with the Exchange.
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The Commission believes that these requirements should help to
ensure that members employ qualified persons as independent contractors
and provide adequate supervision of their securities related
activities, as required by the Act. In addition, Amex Rule 341B will
make clear to independent contractors that they are subject to the
Amex's jurisdiction and, accordingly, are subject to disciplinary
proceedings by the Amex for violations of the Exchange's rules. The
Commission also believes that the provision requiring an independent
contractor to be covered by the member's fidelity insurance, if
required under Amex Rule 330, will help to protect the member against
losses resulting from dishonesty by an independent contractor and is
consistent with the proposal's general requirement that independent
contractors be treated as employees for purposes of the Exchange's
Constitution and rules. The Commission notes that the provisions of
Amex Rule 341B are similar to the NYSE's requirements for independent
contractors.\15\
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\15\ See note 7, supra.
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The Commission finds that the proposed amendments to Amex Rules 340
and 341 are appropriate and consistent with the Act. Specifically, the
Commission believes that the proposed amendments to Amex Rule 341
requiring securities lending representatives and securities traders, as
well as direct supervisors of registered representatives, securities
lending representatives, or securities traders, to register with and be
qualified and approved by the Amex will protect investors and the
public interest by allowing the Amex to evaluate persons who seek to
perform these functions.\16\
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\16\ Registered representatives, securities traders, and
securities lending representatives apply for registration with the
Exchange through the Form U-4. To approve a registered
representative, securities trader, securities lending
representative, or his or her direct supervisor, the Amex reviews
the Form U-4, which contains a registered person's disciplinary
history and information concerning whether he or she is subject to a
statutory disqualification as defined in Section 3(a)(39) of the
Act. The Amex also reviews the Form U-4 to determine whether another
exchange has approved or rejected the registered person's
application to register with that exchange. Telephone conversation
between Robert Klein, Managing Director, Membership Services, Amex,
and Yvonne Fraticelli, Attorney, OMS, Division, Commission, on
December 6, 1996.
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The Commission believes, as it has concluded previously, that it is
consistent with the Amex's regulatory responsibility to monitor the
activities of securities traders and securities lending
representatives.\17\ In addition, the Commission continues to believe
that requiring securities lenders and securities traders to register
with the Amex and assuring that they have adequate qualifications
ultimately will protect investors and the public interest. The
Commission believes that the proposal also protects investors by
applying Amex Rule 341 to an independent contractor who performs the
duties normally performed by a registered representative, securities
lending representative, or a securities trader.
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\17\ See Securities Exchange Act Release No. 25312 (February 4,
1988), 53 FR 4089 (February 11, 1988) (order approving File No. SR-
NYSE-86-22).
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Finally, the Commission believes that the examination requirements
contained in Amex Rule 340, Commentary .03, will help to ensure that
only a person with an understanding of the applicable rules acts as a
securities trader, securities lending representative, or as a direct
supervisor of a securities trader or securities lending
representative.\18\
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\18\ As noted above, there currently is no qualification
examination for securities lending representatives. The provision
relating to securities lending representatives will apply if a
qualification examination for securities lending representatives is
developed.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-Amex-96-34), as amended, is
approved.
\19\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12) (1996).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-902 Filed 1-14-97; 8:45 am]
BILLING CODE 8010-01-M
